Sales of new U.S. homes jumped 6.5 percent to a record high in July, defying economists' expectations for a decline, as purchases soared in the Northeast and West and median prices dropped, a government report showed Wednesday.

Meanwhile, applications for home mortgages decreased last week, with purchasing activity falling for the first time in a month despite slightly lower interest rates, the Mortgage Bankers Association (search) said.

The Commerce Department (search) said new single-family home sales rose to a seasonally adjusted annual rate of 1.410 million units from a downwardly revised 1.324 million unit rate in June. The July sales pace was 27.7 percent higher than a year earlier.

Economists had expected new home sales to drop to a 1.333 million unit pace from June's originally reported 1.374 million unit pace.

While sales climbed, so did supply. The inventory of homes available for sale at the end of July stood at a record 460,000, up 1.8 percent from June and 15 percent higher than a year ago, the report showed. At the current sales pace, the supply of homes represented 4 months' worth in July.

The median price of a new home dropped for the third consecutive month, down 7.2 percent to $203,800 from $219,500 in June and off 4 percent from the price a year ago, the Commerce Department report said. The July sales price was the lowest since December 2003, when it hit $196,000.

The housing sector has been on a tear for more than four years, with home sales and construction striking regular records on the back of stubbornly low mortgage rates that drove demand. While economists now expect 2005 to be another record year, the sector began to show some signs of softness last month, as resales of previously owned homes dropped 2.6 percent and supply started to climb.

In July, sales of new homes climbed 36 percent in the U.S. West and 10.1 percent in the Northeast but fell 13.5 percent in the Midwest and 3.5 percent in the South, the report said.

Meanwhile, applications for U.S. home mortgages decreased last week, with purchasing activity falling for the first time in a month despite slightly lower interest rates. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 0.7 percent to 756.2 in the week ended Aug. 19, denting the previous week's 2.2 gain.

The MBA's purchase index, a gauge of loan requests for home purchases, dropped 2.2 percent to 488.4, erasing the previous week's 0.1 percent gain.

However, the MBA's seasonally adjusted index of refinancing applications rose 1.2 percent to 2313.9 after climbing 5 percent the prior week.

Fixed 30-year mortgage rates fell 1 basis point, or 0.01 of a percentage point, to an average of 5.78 percent, excluding fees, compared with 5.79 percent in the previous week.

While the 30-year rate is below the 2005 high of 6.08 percent reached in late March and the 2005 low of 5.47 percent of late June, it matches its level of a year ago of August 2004.

MBA chief economist Doug Duncan says long-term mortgage rates should hit 6 percent by year-end and 6.5 percent by the end of 2006, curbing price appreciation of homes next year to around 4 percent from recently reported double-dight percentage gains.

The National Association of Realtors (search) (NAR) on Tuesday reported that the national median existing home price at $218,000, up 14.1 percent from a year ago.

Government data show home prices up more than 50 percent over the past five years, fueled by the lowest interest rates in decades.

Fixed 15-year mortgage rates last week averaged 5.41 percent, up from 5.40 percent the previous week.

Rates on one-year adjustable-rate mortgages (ARMs) decreased to 4.84 percent last week from 4.85 percent one week earlier.